A recent commentary on the Washington Post’s “Wonkblog” illustrates the ability of professional economics to collide with common sense. The article seeks to pooh-pooh the idea that America’s oil and natural gas expansion have contributed much to the (anemic) economic recovery, but the arguments are dubious at best. If we just look at unemployment rates at the state level, it is pretty clear that the innovations in the oil and gas sector have done wonders. For those wishing to boost job creation, reduce costs for the average American household, and reduce the deficit with no tax hikes, expanded energy development is still a no-brainer.
Downplaying the Contribution of the Oil and Gas Bonanza
The Wonkblog writer, Brad Plumer, starts off by acknowledging that the US has had higher economic growth since 2009 than “Britain, Japan, the euro zone, and many other advanced nations around the world.” One theory to explain this is the advances in hydraulic fracturing and other techniques, which have allowed “U.S. companies…to exploit new sources of oil and shale gas in places like North Dakota, Texas, Ohio and Pennsylvania.”
Yet Plumer relies on a research note from Paul Dales of Capital Economics, which argues that the oil and gas revolution has little to do with the (modest) US success. Dales writes:
Since June 2009 the volume of oil and gas extraction has risen by 24%. Over the same period the production of mining machinery has risen by 47% and the output of mining support services, which includes oil and gas drilling, has leapt by 58%. The only disappointment is that output of petroleum refining has risen by just 3%.
But that rise explains only a small part of the economic recovery. Admittedly, it is responsible for a fifth of the 18.3% increase in overall industrial production. Given that the oil- and gas-related sectors account for only 2.5% of GDP, they have contributed just 0.6 percentage points (ppts) to the 7.6% rise in GDP. [Bold in original.]
There are serious problems with this kind of analysis. Fundamentally, it assumes that the proper way to measure a factor’s contribution to economic growth, is to look at the share of total spending on that factor.
OK let’s use the same approach to evaluate the contribution of, say, water to US economic growth over the last few years. An estimate from the early 2000s says that the median US household spent about 1.1 percent of its income on water and sewerage. So if all of the water and sewer infrastructure suddenly disappeared in June 2009, would cumulative GDP growth have been 6.5%, instead of the actual 7.6%? No, the economy and official measures of GDP would have collapsed, as the US would have been plunged back into medieval standards of living.
Energy is integral to every sector of the economy, meaning expanded access and lower prices could stimulate measured “growth” all over the place. We see this when Plumer discusses an ostensibly better explanation for US growth:
In all, Dales concludes, it’s hard to give oil and gas more than a small bit of credit for America’s better-than-average economic performance since 2009. “[T]he recovery in US GDP since the recession has been driven by an improved performance across a wide range of sectors, including motor vehicle production and professional business services.”
His preferred theory is that the United States has done better than its peers “partly due to its greater exposure to the faster growing Asian nations and partly due to the willingness of U.S. households to reduce their saving rate more significantly.”
Does that make sense? When trying to understand the relative (though still inadequate) strength of the US recovery since 2009, does it make more sense to credit huge innovations in domestic energy production, or to thank our lucky stars that American households are going deeper into debt?
North Dakota Not About Energy Sector?
Another way to illustrate the problem, is to apply the Plumer/Dales approach directly to North Dakota, a major beneficiary of the Bakken formation. North Dakota currently has the lowest unemployment rate in the country, at 3.3% (as of March 2013). Does anyone seriously doubt that oil and gas development are driving the phenomenal North Dakotan economy?
And yet, if you look at the employment patterns in the state, you might walk away with an erroneous conclusion. From 2010 to 2012, North Dakota added almost 54,000 jobs, a very robust increase of 14 percent over the two years. Yet if you decompose the job growth by major industry, you will see that “Mining and Logging”—which includes oil and gas extraction—is not the leader. No, “Mining and Logging” only contributed about 14,000 jobs, or 26 percent of the total growth.
The leading major industry type was actually “Trade, Transportation, and Utilities,” which added 16,000 jobs, or 30 percent of the total increase. “Construction” also added 8,000 jobs, about 15 percent of the increase.
Thus, someone following the approach of Plumer/Dales might look at the North Dakota economy over the last few years and say, “Sure, the shale boom was an important factor, but not the major one. It can only explain about a fourth of the state’s humming economy.”
Yet this would be silly, as the oil and gas activity is driving the employment growth in those other areas. If it weren’t for the revolution in oil and gas extraction, there would not have been a 15 percent jump in construction employment in North Dakota over the last two years.
I hope I’ve shown the flaws with the Plumer/Dales treatment of energy’s role in the (tepid) U.S. recovery in GDP growth. Yet even if Plumer and Dales are right, and the expansion in oil and gas development has only played a small part in the official economic recovery…we can still turn up the dial. The United States has enormous amounts of energy resources, just waiting to be developed, if only the federal government would give the private sector the green-light to do so.
Contrary to the Dales study, the revolution in domestic energy production has been beneficial to job-seekers, as well as businesses and households who benefit from inexpensive energy. Regardless of the specific contribution of this factor since 2009, the federal government can immediately get more of it by simply allowing producers access to the vast amounts of untapped supplies. Such a move would spur additional job creation, reduce household energy costs, and bring in hundreds of billions in additional federal revenue, thus reducing the deficit without the need for explicit tax hikes.